‘Revenue neutral’ carbon-tax initiative could cost state $675 million

The campaign to create a new carbon tax in Washington has been selling its 2016 initiative as “revenue neutral” — saying it would balance out its tax increase with tax cuts to have little net impact on the state budget.

But a state analysis calls that into question, estimating Initiative 732 would cut overall state tax collections by about $675 million over four years, even as the state faces big demands for increased education and mental health funding.

While that figure is disputed by I-732 backers, it could give ammunition to environmental and progressive critics who have pushed for an alternative that would bring in more money for the state while still fighting climate change.

The analysis, conducted by nonpartisan legislative staff, was requested by state Rep. Reuven Carlyle, D-Seattle, chairman of the House Finance Committee. Carlyle said he respects the efforts of I-732 backers and supports putting a price on carbon emissions, but that the impact on the state budget has to be considered.

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Yoram Bauman, co-founder of Carbon Washington, the group backing I-732, said he disagrees with the state analysis. “I continue to be confident our policy is approximately revenue-neutral,” he said.

I-732 would impose a tax of $25 per metric ton on carbon emissions from gasoline, natural gas and other fossil fuels. The dirtiest sources of power, such as coal, would face the highest taxes, giving industries an incentive to find cleaner alternatives.

At the same time, the initiative would reduce the state sales tax from 6.5 percent to 5.5 percent and drastically cut the business and occupation tax for manufacturers. It also would fund a tax rebate of up to $1,500 a year for low-income families.

Carbon WA says I-732 would raise about $1.7 billion annually in carbon taxes but give away an almost identical amount with its tax cuts. Backers estimate it would add a net total of $44 million to state coffers between fiscal years 2018 and 2021.

But the legislative staff disagrees. The biggest dispute is over how much electric utilities would wind up paying under the carbon tax.

I-732’s assumptions are based on charging utilities the highest tax possible for energy purchases whose source is not itemized to regulators — essentially assuming those sources are all coal-generated.

But the legislative staff analysis, based on a state Department of Commerce model, suggests that’s unrealistic, since the new carbon tax would give utilities an incentive to itemize their power sources to reduce their tax liability.

Bauman said he believes the state analysis lowballs I-732 somewhat by failing to account for the measure’s requirement to tax power sales by Washington utilities to other states.

I-732 has divided the environmental community in Washington. Supporters last week rejected a last-minute pitch by a coalition of environmentalist and Democratic-leaning groups to abandon the measure in favor of a competing climate proposal critics believe would be more viable.

“It’s really concerning that they’re putting forth such a poorly written and deeply flawed initiative while we’re facing huge demands for education funding,” said Adam Glickman, secretary-treasurer of Service Employees International Union Local 775, which represents nursing home and other long-term care workers.

SEIU is part of the Alliance for Jobs and Clean Energy, the coalition that has tried to push I-732 supporters to stand down in deference to an as-yet unspecified alternative initiative for the 2016 ballot. I-732’s decision to move ahead leaves the alliance’s plans up in the air, with strategists and donors wary of placing two competing climate measures on next year’s ballot.

Carbon WA submitted its remaining signatures for I-732 to Secretary of State Kim Wyman’s office on Wednesday. The campaign gathered more than 362,000 signatures, giving it more than enough cushion to get the 246,732 valid signatures needed.

As an initiative to the Legislature, I-732, if certified by Wyman’s office, would require lawmakers to either pass it into law or let it be placed on the November 2016 ballot. Lawmakers also have the option of placing an alternative on the ballot alongside the initiative.

If I-732 does end up on next November’s ballot, the state will develop an official revenue-impact statement, as it does for all ballot measures. The legislative staff analysis can be seen as a first draft of that, but Carlyle and Bauman agreed more rigorous study is warranted.

Carlyle said Carbon WA has “forcefully and responsibly changed the dialogue in this state about pricing carbon.” But with a policy this momentous, he said, “the challenge is the law of unintended consequences.”